Thursday, 10 March 2022 12:11

Get Ready For Tax Season

By Stephen Kyne, CFP | Families Today
Get Ready For Tax Season

It’s everyone’s favorite time of year: Tax Time! 

While it may seem like the books are completely closed on 2021, there may still be some things you can do to reduce your liability, as well as steps you can take to better manage your taxes for 2022. 

If you own a business that is structured as a pass-through entity, like a Partnership or an S-Corp, you might want to consider electing to pay the New York State Pass Through Entity Tax (PTET). This election could effectively allow you to pay your NYS income tax through your business, thereby getting around the federal limit on the personal deductibility of your state and local tax payments, which is currently capped at $10,000. Since the payment would be a business deduction, it would reduce your net income, and thereby reduce your federal tax liability. Your business MUST elect each year, by March 15.

You might not realize it but you may be able to make contributions to your Roth IRA for 2021 up until the earlier of your tax filing date, or April 15.  If eligible, the contribution limit is $6,000 ($7,000 for those age 50+), but don’t be discouraged if you are not able to fully fund your account for the year. Every bit you can save will help provide for your lifestyle in retirement, so a partial contribution is better than no contribution at all. 

Just because one spouse may be a homemaker or already retired, doesn’t mean that they can’t take advantage of a Roth IRA.  IRS rules also allow for contributions to an account for a homemaker or retired spouse, as long as the working spouse has sufficient earned income, even if the spouse is older than 72.

Since Roth IRAs can provide tax-free distributions and are not subject to Required Minimum Distributions at age 72, they can be an extremely beneficial retirement funding option!

If you’re looking for a tax deduction today, consider contributing to a Traditional IRA instead. The limits are the same, and your contribution can be tax-deductible for 2021 if made prior to the earlier of your filing date or April 15. If you have access to a retirement plan at work, however, your ability to deduct traditional IRA contributions may be limited or eliminated. 

Anyone whose earned income is reported to them on a form 1099, K1, or other similar non-employee form, may be eligible to establish and fund a retirement plan for 2021. The IRS rules allow this to be done up until the filing deadline (including extensions) for the previous year. Popular plan options include a SEP IRA and Individual 401k.

For those who are self-employed, and don’t have access to a retirement plan through an employer, you may think you’re being disadvantaged when it comes to saving for retirement. The opposite, however, may be true. As a self-employed person, you could have the options of contributing up to $58,000 to a retirement plan for 2021 and deducting the full contribution! 

A SEP IRA can allow you to contribute up to 25% of your income with a maximum contribution of $58,000 and can be appropriate for business owners with high income and no employees. Because of the 25% limitation, your income would need to exceed $232,000 in order to fully contribute.

An Individual 401k has the same funding limit of $58,000 for 2021; however, there is not a 25% limitation. Those over age 50 could contribute an additional $6,500.

Individual 401ks require more in the way of record keeping and compliance, so they can be more expensive and cumbersome than a SEP IRA. Remember, you don’t have to be able to fully fund a plan for it to still make sense. Don’t rule out an Individual 401k because you can “only” afford to contribute $30,000 to it.

You may have missed the boat on other types of retirement plans for 2021, but there is still time to elect plans for 2022. If you’re a business owner, you may want to explore establishing a 401k plan, profit sharing plan, or SIMPLE IRA for your business. 

The mail this year has been notoriously slow so, while you may be tempted to run out and file right away, be sure to double check that you’ve received all of your expected tax documents. Also be sure to check that none of the documents you’ve received are marked “DRAFT.” 

As a point of disclosure: Your circumstances are unique and tax regulations can be very complex. Before implementing any tax strategy, we recommend working closely with your Certified Financial Planner® Professional and tax preparer to determine eligibility and funding limits, and to help ensure your retirement funding and tax strategies comply with all appropriate regulations and meet your needs.

Stephen Kyne, CFP® is a Partner at Sterling Manor Financial in Saratoga Springs and Rhinebeck.

Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant & Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities.

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